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What We Read Today 08 June 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • IEA Says the Party’s Over (Richard Heinberg, post carbon institute) The International Energy Agency says it will require $48 trillion invested over the next 20 years to meet global energy needs. They say there is no credible policy framework in place to make that happen. Oil extraction investment has been declining because production costs are not met at current prices. U.S. shale oil production is projected to peak by 2020. (So we're in a "shale bubble".) See also next article.

  • World Energy Investment Output (International Energy Agency, 2014) U.S. shale production is expected to peak by 202o but continued growth of Middle East oil production is projected for the next 20 years. See graph below. It is also projected that only with major growth in alternative energy production will global energy need be achievable over the coming two decades.

middle-east-oil-iea-2014

  • Valukas Assumes GM’s Reported Quality Was Real despite 13.8 Million Recalls in Five Months (William K. Black, New Economic Perspectives) William K. Black contributes to Global Economic Intersection. Prof. Black accuses GM of hiding massive accounting control fraud behind reports of law firms with "disabling conflicts of interest". This article is a brutal dissection of the ignorance about control fraud displayed by one of the "independent" attorneys who generated a report on GM.
  • Will we starve after all the bees die? (Fabius Maximus) Fabius Maximus has contributed to GEI. Main points are (1) there have been bee colony losses recorded for well over 100 years; and (2) there is no population collapse but about a 10% bee colony decrease over the last 25 years.

honey-bee-colony-counts-1990-2012-FM-2014-Jun-07


Today there are 13 articles discussed 'behind the wall'.

Included today near the end are three articles which portray the distressing blindness of most of the economics community to the causes of the Great Financial Crisis.

Please support all that we do at Global Economic Intersection with a subscription to our premium content 'behind the wall'.

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  • Portfolio Rebalancing: Get It Right (Allan S. Roth, Financial Planning) This study indicates the following for optimizing portfolio performance, in rank of importance (most important first). Important: (1) Set an allocation; and (2) rebalance to a rigorous formula (in this case twice a year). Not important: (1) what allocation you select (conservative, moderate or aggressive); (2) insights into how markets or the economy are (will) perform. This article does not discuss the importance of asset class selection, either in type or in number.

In this study, the three very different allocations among three Vanguard mutual funds all outperformed the best performing individual mutual fund. See first graphic below. Before you say the differences are unimpressive, over the 15 years the gain on a $100,000 portfolio compounding at 5.00% and one growing at 5.72% is $22,441 (22.4% more). Over a full 30 year cycle (say a retirement account between age 35 and 65, $100,000 would grow to $432,194 at 5.00% and to $530,536 at 5.72%. That is a difference approaching $100k. Econintersect cautions that this is a snapshot covering one specific 15-year period. For a more thorough evaluation of the effects, the results should be replicated for 15-year periods rolling over a couple of business cycles.

A second graph below shows the dramatic differences in volatility of portfolio returns between the three allocation decisions. The current result of little return difference after 15 years would not have been the result from late 2008 through late 2012, for example. That makes the caution mentioned above regarding study of more 15-year time periods very important. Other periods may (almost certainly will) show significantly different results. It is unlikely that the value of rigorously following a rebalancing formula will be invalidated, however. After all, it is a process forcing you to buy low and sell high in a consistent pattern.

rebalance-roth-fp-2014-jun-03

rebalance-roth-fp-15-year-2014-jun-03

  • Internet Giants Erect Barriers to Spy Agencies (David E. Sanger and Nicole E. Perlroth, The New York Times) Tis article says that an "era of quiet cooperation is over". Google and other internet giants are developing end-to-end encryption tools to enable users to thwart governments (or anybody else) from intercepting their transmissions anywhere in the world. The article also says that governments are still seeking ways to tap directly into internet data streams. Meanwhile, another bug has been found in widely used encryption software that allows hackers to jump right in and decrypt transmissions. See New Bug Found in Widely Used OpenSSL Encryption (Nicole Perlroth, The New York Times)
  • ‘Bad inflation’ shadows Japan (Tomoyuki Tachikawa, The Japan Times) Inflation is Japan ia happening in all the wrong places: rising cost of imports (especially energy and food), falling wages and lower industrial production. Corporations are resisting the government call for wage hikes. BOJ (Bank of Japan) Governor Haruhiko issued upbeat statements near the end of May. But what is the story about 'whistling by the graveyard'?

Click on infographic for larger image at The baseline Scenario.
bank-fraud-headlines-kwak-2014-jun-06-600x500

  • Reverse mortgages rising fast to deal with retirement shortfalls (Garry Marr, Financial Post) One lender is quoted as saying reverse mortgages are up 26% year-to-date. But there are still relatively few issued. The lender quoted has seen an increase to 3,000 reverse mortgages issued thus far in 2014 compared to 2,380 for the same period last year.
  • In Some States, Emissions Cuts Defy Skeptics (Justin Gillis and Michael Wines, The New York Times) This article is short on data. The summary says that at least 10 states reduced carbon emissions but it also shows 9 states increased. How do we know that interstate energy sales are accomplishing some of the reduction by buying more energy from states increasing emissions? What is the impact of increased electricity purchases from Canada. The U.S. doubled net electricity imports from Canada from 2005 to 2012 and the New England states and New York are the largest importers. The Pacific northwest and upper Midwest also import Canadian electricity. Other sources (for example, see EPA report) have reported carbon emissions from electrical generation have fallen by 11% from 2005 to 2012. See second graph below. This is data that would be important for the NYT article but is not included.

greenhouse-elec-epa-2014-feb

So I can't tell you when macroeconomics will have a real breakthrough. Will we be able to get insight from simulated economies (called agent-based models)? Will huge multiplayer online video games give us a laboratory to study recessions? Should we look at cities as economies, and gain some insight there? Or is there some other data-gathering method so different from what we do now that I can't even imagine it?

Econintersect will suggest answers:

1. No insights will be obtained from agent-based models. The macro-economy cannot be represented by an extrapolation of microeconomics. The higher order cross-term interactions between micro elements can overwhelm the linear combinations of the micro-elements. This is the great intellectual failure of the movement to establish microfoundations for macroeconomics, the life work of Robert Lucas. If he is "the most influential macroeconomist since Keynes" as the author suggests, then the lak of success in economics is largely explained.

2. Perhaps. But a process flow analysis for macroeconomics will be needed to bring such behavioral experiments into a closed form.

3. Not directly. Cities may be interesting studies in and of themselves but, unless they are city-states the gross interactions between cities and other cities within the sames state or nation, between cities and their respective states and between cities and their federal structure will be major factors. To study cities in isolation is a fallacy of ceterus paribus.

4. The author mistakenly argues that the problem is lack of data. Yes, more and better data will always be helpful, but the primary problem with economics has been and still is improper treatment of the data available. The economics profession ignored and isolated economists such as Irving Fisher (debt deflation theory - 1930s), Hyman Minsky (financial instability theory - 1960s and 1970s), Wynne Godley (sectoral balance accounting) and most recently Steve Keen (economic process flow analysis - currently active). These economists have all clearly identified key features of how the macroeconomy works - and all have been substantially or completely ignored. There are others not mentioned here as well, see second article below. See next article for Godley's 1999 modeling of economic trouble for the twenty-first century. See also second article following below for 12 who saw it coming.

  • Seven Unsustainable Processes (Wynne Godley, Levy Institute) In this 1999 paper Godley outlines a number of scenarios using sectoral balance accounting as the model. It is a little disingenuous to call this a model since it is simply looking at hypothetical future data applied to a complex accounting identity. The term model is often meant to apply to a theoretical structure, not a real relationship as Godley did here. What he determined was that trends evident in 1999 were unsustainable and at some point would necessarily roll over into decline. He professed to not being clairvoyant so he made projections for various scenarios that had roll over occurring in different years from 2000 all the way to sometime after 2010. Note: He did not model the variables as they actually were to play out - that produced a double roll over, one in 2001 muted by aggressive monetary and fiscal policy easings and then a bigger event in 2007-2009 which had relatively insufficient actions when compared to the 2001 recession.

godley-private-debt-1999

godley-private-debt-projected-conseq-1999

  • Twelve Who Forecast the Financial Crisis (John Lounsbury, GEI Analysis) This is a review of Dirk Bezemer's work published in 2009 which documented the importance of debt and money accounting in macro-modelling as a common factor among the few economists who clearly forecast that there would be a financial crisis in advance of the crash.
  • Best Benchmarks for Client Portfolios (Craig L. Israelsen, Financial Planning) It makes no sense to benchmark a multi-asset class portfolio against a single stock index such as the S&P 500. Econintersect suggests that for a portfolio rebalancing strategy one appropriate benchmark is the portfolio without rebalancing. Another is the closest generic index for each investment in the portfolio and including rebalancing. Such a double benchmark assesses the value of rebalancing and also the value of asset selection within each asset class.

benchmarking-bad-Israelsen-fp-2014-jun-02


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